Introduction
Small and medium-sized enterprises (SMEs) comprise a significant part of the economy of Dubai. In 2011, Hawkamah and Dubai SME conducted a survey investigating the importance of corporate governance for SMEs. The results indicated that almost eighty percent of SMEs found corporate governance important or even vital for their activities. According to OECD (2004, p. 11), ‘corporate governance involves a set of relationships between a company’s management, its board, its shareholders and provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined’.
Dubai SME’s Corporate Governance Code was created to eliminate barriers to the efficient implementation of corporate governance reforms. The Code includes nine pillars that aim to establish efficient corporate governance in SMEs of Dubai. Although nine pillars cover the most significant principles of corporate governance, several issues such as leadership and security may be added to them.
Dubai SME
Small and medium-sized enterprises in Dubai may be identified as a company with the overall turnover of no more than two hundred million UAE dirhams. Also, SME cannot have more than two hundred fifty employees. According to Dubai SME (2014), these types of enterprises comprise the cornerstone of the economy of Dubai. More than ninety percent of companies may be classified as SMEs in Dubai. As a result, SMEs provide working opportunities for almost fifty percent of residents of the Emirate.
Also, it is necessary to mention that Dubai SME is also the name of the agency of the Department of Economic Development of Dubai. This agency initiated the study of the corporate governance of this sector of business in Dubai.
General Definition of Nine Pillars
Nine pillars of the Corporate Governance Code were initially implemented in public and large organizations. However, the survey conducted by Dubai SME demonstrated that small and medium-sized enterprises could benefit from establishing principles of corporate governance as well. According to Parmar (2011), new regulations were suggested for companies to demonstrate their dedication to corporate governance and to improve business relations with investors and banks. The author also dwelled on the fact that introducing new recommendations were rather a challenging task because SMEs did not recognize substantial difficulties due to the lack of proper corporate governance.
Dubai SME emphasizes that nine pillars should be considered as recommendations for further improvement and development. Hawkamah, the corporate governance institute, and Dubai SME have developed practices that are universal for a wide variety of organizations regardless of their management approaches, size, the structure of ownership, and other differences between companies’ operations. Nine pillars describe several broad aspects.
First, they include recommendations about procedures and policies connected with corporate governance. Second, they describe the proper type of relations between shareholders and stakeholders. Third, some pillars provide recommendations about the management of risks, audits, and other types of control of the environment. Also, the Corporate Governance Code suggests strategies for sharing responsibilities and efficient decision-making for the board of directors. Finally, pillars light up the family business sector that comprises a substantial part of the Dubai economy. Nine pillars of Corporate Governance Code include (Saad 2012):
- Creation of a framework that describes the division of roles and responsibilities between shareholders, directors, managers, and partners;
- Formation of the plan that aims to improve leadership practices in the organization;
- Establishment of transparent relations and open sharing of information with all key bodies of the organization;
- Formation of the board of directors that is responsible for the development of the company;
- Development of the mandate for the board of directors;
- Promotion of maximum accountability;
- Creation of a framework for internal control;
- Recognition of stakeholders’ needs;
- Establishment of agenda for the monitoring and regulation of family business.
Explanation of Every Pillar
The first pillar concerns the division of roles among those who operate the company. An efficient framework should reflect the vision, mission, and values of the organization. Also, it is crucial to set out the rights of all partners and shareholders. Besides, the framework should include a precise description of the responsibilities of managers, directors, shareholders, and other parties. This pillar is crucial because SMEs often lack an exact definition of roles and responsibilities (Dubai SME 2014).
The second pillar, the creation of a succession plan, is of primary significance for family-run companies and developing businesses. The existence of such a plan lets the company envision strong and weak sides of the business and prevent possible drawbacks. A good succession plan includes not only the description of scenarios for development but also exit strategies for emergencies. This pillar is important for corporate governance because it predetermines the company’s actions under particular circumstances.
The next pillar refers to the promotion of open and transparent communication between principal individuals in the company. The establishment of reporting protocols and legal framework for identification of rights to share information may be effective practical steps (Pinsent Masons 2013). The description of relationships between executives and shareholders is crucial for the prevention of future conflicts.
The fourth pillar is about endeavoring the board of directors in the company. The board is necessary for the efficient decision-making process in the organization. However, the importance of the board differs depending on the type of firm. Thus, small companies are more likely to establish an advisory board of directors without formal and legal rights. Medium-sized and growing companies should endeavor the board to formalize the process of decision-making.
The fifth pillar is connected with the regulation of the board of directors’ activities. The mandate of the board should predetermine the role of the board, scope of power, frequency and location of meetings. The important aspect refers to the analysis of the board’s performance. Thus, the company should conduct regular assessments to evaluate its progress and efficiency (Pinsent Masons 2013). This pillar is also significant for the organization of the working environment in the company.
The sixth pillar refers to the need to establish an open and transparent system of accountability. The company should provide financial statements containing information about cash flow, financial situation, and income of the company. Also, the company should employ auditors who will evaluate the effectiveness of accounting policies. Auditors should be independent representatives who are not interested in the company’s activities (Dubai SME 2014). Financial operations and proper accounting belong to the most significant aspects of the company’s activities, and that is why they require the highest level of monitoring.
The next pillar concerns the establishment of the system of internal control. Every company faces particular challenges. The proper and timely evaluation of risks is an asset. It is necessary to evaluate both internal and external risks regularly (Pinsent Masons 2013). For instance, the company may experience a loss of key employees. Finding the reason for this is necessary for the elimination of the problem and further retention of employees. Assessment of risks should become an integral part of the company’s activities as far as it contributes to the achievement of success.
The eighth pillar presupposes the recognition of stakeholders’ needs. Initially, the company has to classify central stakeholders into such groups as clients, employees, suppliers, bankers, and so on. Then, the firm has to identify their needs and develop policies aimed at meeting those needs. ‘A company’s greater understanding of employee attitudes, customer perspectives and impacts on communities can not only reduce risks but also be a way of identifying value-enhancing opportunities for the future’ (Dubai SME 2014, p. 23).
The ninth pillar is connected to the distinctive type of business in the United Arab Emirates — a family-owned business. This section of the Code provides suggestions for the regulation of family relationships. Thus, it is recommended to formulate and define the rights and responsibilities of all family members who are engaged in business officially (Gillespie 2011). This pillar is necessary for family members to realize the boundary between family relations and business.
Comparison of pillars with Australia
In 2003, the ASX Corporate Governance Council introduced ‘Corporate Governance Principles and Recommendations’. The Council is the official body that united different shareholders, business owners, and industries. One of the aims of this Council was to develop a set of principles and recommendations that would be useful for Australian SMEs.
The Council identifies eight central principles of corporate governance for Australian businesses (ASX Corporate Governance Council 2014):
- Division of responsibilities and management;
- Structure of the board of directors;
- Ethical behavior;
- Safe reporting;
- Proper and timely disclosure of information;
- Recognition of security holders’ rights;
- Risk management and recognition;
- Fair remuneration of executives.
Ideas of most principles coincide with Dubai SME’s Code of Corporate Governance though there are some differences. Thus, the significance of corporate policies and procedures is recognized in both countries. The second common feature refers to the transparency and disclosure of information. Dubai SME’s third pillar describes the need for an open flow of information. The same notion is rendered in ASX Council’s fifth principle. Also, both countries pay attention to the structure and performance of the board of directors and risk management. Still, there are some differences between approaches to corporate governance.
For instance, Australian Council emphasizes the importance of reporting in general while Dubai SME focuses on financial accountability mostly. Only Dubai SME’s Code mentions the need for the recognition of stakeholders’ needs. One more aspect of corporate governance typical for Dubai and UAE only — framework managing family relationships in business. Distinctive features of Australian corporate governance include the emphasis on ethical and responsible behavior and the need for the fair remuneration of directors to retain and motivate senior executives.
Suggestions
Recommendations provided by Dubai SME, an agency of the Department of Economic Development, cover all the most significant aspects of corporate governance. They focus on the management of relations between key individuals in the company and the transparent and open flow of information. Principles of ASX Corporate Governance Council include several important points that are not mentioned in Dubai SME’s Code such as fair remuneration and ethical behavior.
Good corporate governance is impossible without leadership. Every company should have particular principles of leadership style. This suggestion is especially useful for growing companies. Such firms need a visionary and transformational leader. Still, the leadership approach should reflect the mission and values of the company.
One more pillar that can be added is security. Every company that follows the principles of the open flow of information faces the need to share the particular data and protect them at the same time. The maintenance of such a balance may become rather a challenging task. Personal data and information should be protected properly. Otherwise, the company will lose credibility and trust (Roman 2014). Besides, cyber-attacks are becoming more urgent threats nowadays. Consequently, corporate governance should identify policies, procedures, and regulations connected with cybersecurity.
Summary and Conclusion
The term ‘corporate governance’ is used to describe a set of principles that predetermines the company’s management, relations between directors, executives, and shareholders, and other aspects crucial for the efficient performance of the particular company. In 2011, Dubai SME conducted a survey aimed at the investigation of the significance of corporate governance for small and medium-sized enterprises.
The findings proved that SMEs could benefit from the implementation of corporate governance principles. Consequently, Dubai SME developed a Corporate Governance Code that included nine pillars of efficient corporate governance. All pillars emphasize the need for the exact division of responsibilities, transparency of information disclosure, and evaluation of the company’s performance. These pillars have been compared to Australian principles. Both countries recognize the importance of the transparent flow of information and the proper identification of responsibilities. However, both countries should take into account the issues of cybersecurity and the leadership style that is relevant to the company’s vision and values.
Reference List
ASX Corporate Governance Council 2014, Corporate Governance Principles and Recommendations. Web.
Dubai SME 2014, The Corporate Governance Code for Small and Medium Enterprises. Web.
Gillespie, M 2011, Corporate Governance Code Launched for Dubai’s SME Sector. Web.
OECD 2004, OECD Principles of Corporate Governance, OECD Publications Service, Paris. Web.
Parmar, N 2011, Nine pillars of growth. Web.
Pinsent Masons 2013, Corporate Governance. Web.
Roman, A 2014, The Three Pillars of Corporate Governance. Web.
Saad, J 2012, Pillars of practice: Corporate Governance. Web.